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The screens and in-betweens of ethical investing

Traditionally, ethical investing took the form of strict negative screening. ‘Sin screens’ were applied to an investment universe, restricting exposure to industries such as alcohol, gambling or tobacco.

‘Impact investing’ on the other hand takes a more positive approach, seeking out investments with ethical exposure to specific environmental or social projects, such as funding wind farms or organic food producers. However, impact investing is a relatively new and niche investment strategy. Generally, these projects aren’t diverse or common enough to enable an ethically minded investor to create a broadly diversified, balanced portfolio.

In-between impact investing and negative screening sits environmental, social and governance (ESG) investing. Often an area whose importance is overlooked, taking ESG factors into account can potentially lead to higher investment returns without limiting diversification, which can occur in strictly negatively screened portfolios.

Positive ESG investing focuses on developing a greater collective voice, pressuring companies to address and improve their standards. This allows investors to be proactive in addressing unethical issues, rather than simply ignoring them and hoping the issues will resolve themselves. Engaging with companies on ESG issues is now starting to gain recognition not just in ethical funds, but also in more traditional strategies.

Here’s an example. US firm Mohawk began as a flooring manufacturer. Noting the need to improve their environmental standards, it started recycling old carpets and plastic bottles to provide its raw materials. That recycling arm grew to the extent that Mohawk is now responsible for around 20 per cent of all bottles recycled in the US. They also produce enough recycled nylon to enable them to have a viable business arm selling nylon pellets to car parts manufacturers.

However, the most effective manner to achieve these goals is by proactively incorporating ESG into investments. Rather than simply excluding certain industries, and turning a blind eye to the wider issues surrounding us and future generations, ESG investing combines the virtues of putting one’s savings towards a better future of our planet, while at the same time generating the necessary returns for one’s own future.

A timely tax boost for the Treasury

February saw the Treasury given some welcome news, with the announcement of unexpectedly high tax revenue in January. This meant the budget deficit had fallen to its lowest level since before the financial crisis.

The government has now borrowed £37.7bn over the past 10 months, some £7.2bn less than the same period a year ago. It puts the Treasury on track for the lowest budget deficit in a decade.

According to the Office for Budget Responsibility, the welcome boost to public revenues will lead to a “significant” upgrade to its outlook for the economy in March. This comes just four months after it delivered a substantial downgrade, based largely on a downgrade to expected productivity growth. The Office for National Statistics (ONS) also showed productivity growth was much stronger than expected in the fourth quarter of 2017, making the second half of last year the strongest for productivity growth since before the crisis.

But it wasn’t all good news. The ONS also revealed the UK economy grew less than originally thought in the last quarter of 2017, with GDP expanding just 0.4 per cent quarter-on-quarter, down from the estimated 0.5 per cent. That dragged down 2017 overall growth to 1.7 per cent, putting Britain bottom of the G7 economies.

In another blow, growth in business investment was flat over the same period. This sluggishness has been put down to enduring weakness in the UK’s traditional ‘domestic growth engines’ (business investment and consumer demand). Without these two, the UK has been reliant on the strong global growth environment. Positive momentum in the eurozone has had quite an effect, as demand for British exports has been bolstered by EU growth.

The Bank of England has turned decidedly hawkish recently, making sure price inflation does not upset economic growth prospects further down the line. But now that growth has come in weaker, despite stronger-than-expected productivity, they may want to see events play out before acting on interest rates.

Of course, what the Bank does will depend largely on what the Treasury does. On that front, we expect some policy changes from Chancellor Philip Hammond. This government has already tried to break from the austerity policies of the Cameron-Osborne days, but they haven’t exactly done so with much enthusiasm, focusing more on slight fiscal expansion without fiscal stimulus. The latest developments might change their thinking.